What Is Heikin Ashi and How to Use It in Trading
Heikin Ashi: The Basics
As you can see from the name of the indicator, it should somehow relate to Japan. If you translate Heikin Ashi from Japanese, you will get an "average bar." Every trader knows the famous Japanese candlesticks. No matter what security you trade, it’s more likely you will use the chart with Japanese candles. However, there are other chart types. And Heikin Ashi is one of them. Furthermore, this technique is both a chart type and an indicator.
Heikin Ashi candles look like the usual Japanese candlesticks, but remove market noise.
Munehisa Homma created this approach in the 1700s. Heikin Ashi candlesticks resemble usual Japanese ones. At the same time, the indicator makes the chart more readable and helps determine a strong trend. Would you like to know how it works? Look at the example.
Heikin Ashi Candles: Example
We prepared an example to ease the understanding. We took a 1-hour chart of the EUR/USD pair and applied the Heikin Ashi index to the chart with usual Japanese candlesticks.
The upper chart is the Japanese candlestick chart, the bottom one is the Heikin Ashi.
The Heikin-Ashi chart has a smooth effect, as it counts the movement of a price as the average. Moreover, if you look at the candlestick colors, you will see they don’t match. This happens because Heikin Ashi depicts the whole bullish trend in bullish color (green color on our charts) and the bearish trend in a bearish color (red color on our charts).
If you look at the candlewicks, you will see that most of the Heikin Ashi candles don’t have shadows. The lack of shadows signals a strong trend. The current price of the asset you trade may differ from the Heikin-Ashi one. Additionally, Heiken-Ashi charts don’t reflect price gaps.
Heikin Ashi: Learn the Core
To better understand the essence of the indicator, let’s consider several points that will clarify how Heikin Ashi works.
The Heikin Ashi is mostly used to smooth the market and get rid of market noise. As we continue comparing Japanese candlesticks ad Heikin Ashi candles, let’s repeat, the Japanese candles show open, close, highest, and lowest points of the price for a specific period.
The aim of the Heikin Ashi is to serve as an trend indicator.
That’s why it needs a particular formula:
- To calculate the open price, you need to add open (previous bar) and close (last bar) prices and divide the sum by 2.
- To calculate the close price, you need to add open, high, low, and close prices, divide the sum by 4.
- To get the high, you need to get the maximum from high, open, or close of the current period.
- To get low, you need to get the minimum of the low, open, or close of the current period.
Even though the formula doesn’t look complicated, you won’t need to calculate any point as the indicator is built in automatically.
How to Implement It
The Heikin Ashi chart is inserted on all trading platforms. If we talk about MetaTrader, you should find the “Insert” window, click on the “Indicators” tab, choose “Custom”. Heikin Ashi will be on the list.
At the same time, Heikin Ashi can be implemented as a chart type. Switch Japanese candlesticks to Heikin Ashi.
Heikin Ashi: Catch Its Signals
Heikin Ashi clearly reflects what tendency prevails in the market. So, a trader knows whether to stay in a trade or close it as the trend has paused. Thus, we can highlight two main factors of the indicator.
The first indicator’s function is to measure the strength of the trend. Any small consolidation and correction is barely visible on the chart as the indicator smooths it. To trade in the trend with Heikin Ashi, it’s recommended to use a trailing stop. A trailing stop will help you widen your rewards trading within the trend.
In the case of a strong trend, the trader can stay in the trade and benefit from it.
- Bullish trend. It’s unlikely you will find lots of Japanese candlesticks without shadows. However, it’s a common thing for Heikin Ashi. If you see lots of bullish candlesticks without a lower shadow, it’s a strong signal of the uptrend.
- Bearish Trend. The opposite rule applies to a bearish trend. Bearish candlesticks without upper wicks signal the strong downtrend.
- Triangles. If you are familiar with the triangle pattern applied to Japanese candles, you won’t have difficulties finding the pattern on the Heikin Ashi indicator. There are three types of triangles. They are the ascending, descending, and symmetrical triangle. If the indicator breaks above the upper boundary of the ascending or symmetrical triangle, the upper trend will continue. If the candles fall below the bottom line of the descending triangle, the downtrend will strengthen.
A reversal signal helps the trader to determine time when to exit the previous trend-following trade and enter a new trend. It will prevent the trader from losses and will give an opportunity to enter a new trade fast.
Trend reversal will prevent traders from losses and will help to enter a trade fast.
- Doji candlestick. A Doji candlestick (a candlestick with a small body and long shadows) always signals uncertainties in the market. As for Heikin Ashi, such a candlestick is a sign of a trend reversal.
- Wedges. A wedge is an indicator that barely differs from the triangle. There are two types of wedges: rising and falling. If you see the rising wedge on the indicator, wait until a candlestick breaks below the indicator's bottom line. If you find a falling wedge, wait for the price to break above the upper line, the bearish trend will reverse.
Heiken Ashi Charts: Analysis
If the rules seem complicated, let’s consider a real example.
- As we can see, the pair formed a strong uptrend on the 1-hour chart. Bullish candlesticks didn’t have lower shadows.
- Candlesticks under the number 2 are Doji candlesticks that have small bodies and long shadows. They signaled a trend reversal. As we consider the short-term timeframe, the trend may change often.
How to Combine with Indicators
As the Heikin Ashi is a trend indicator, you should use other trend indicators to strengthen its signals. Moving Averages and Parabolic SAR are among the most reliable trend indicator that can help you get a confirmed signal.
Combine Heikin Ashi with other indicators to get stronger signals.
Benefits and Limitations
As with any other indicator, Heikin Ashi has advantages and disadvantages. It’s important to notw that it has more pros than cons.
|Easiness. It is one of the most accessible indicators. Firstly, it doesn’t require a particular installation. You can find the indicator on any trading platform. Secondly, it’s easy to read its signals as any trader even a newbie can work with Japanese candlesticks and their patterns.||Gap. There is no indicator that wouldn’t lag in time as all of them base signals on the historical price movements. Same for the Heikin Ashi, the indicator stays behind the price.|
|Strong signals. Heikin Ashi is one of the most reliable indicators as it uses only historical price movements that give precise results.|
|Filter. The indicator filters market noise and reduces small corrections.|
|Ability to combine. As the indicator can provide signals on the trend strength and market reversal, it’s possible to combine it with almost all chart patterns and indicators. An ability to combine indicators will provide you with more reliable signals.|
|Any timeframe. A significant advantage of the indicator is the opportunity to use it on any timeframe. However, signals on bigger timeframes are more reliable.|
The Best Heikin Ashi Trading Strategy
In this example, we will consider a strategy with a buy signal. To apply the same strategy for the sell signal, do opposite steps.
Step 1. Find a strong bearish trend.
Step 2. Wait until the bearish Heiken Ashi candlestick changes to bullish. The first bullish Heikin Ashi candlestick should have a long upper shadow.
Step 3. Open a long position at the next Heikin Ashi candlestick.
Step 4. Remember about the stop loss. It should be placed below the low of the first bullish candlestick.
Step 5. It’s time to close. Close the trade as soon as the Heikin Ashi candle comes close to the level of the previous bullish candlestick.
Tips for Traders
Here is our best trading advice when it comes to using Heikin Ashi:
- Combine. Although, the indicator is one of those that provide the most trustworthy signals, as any indicator, it has time lags. Thus, to not miss a good signal, it’s essential to get additional confirmation.
- Higher timeframe, more definite trend. As you may know, the trend is stronger on the bigger timeframes. Although, the indicator works perfectly on any timeframe, it’s recommended to use it on bigger ones (from H1).
- Don’t confuse Japanese candlestick with Heikin Ashi candlesticks. Although, it seems there are not many differences between these types of candles, as we said above, the Heikin Ashi chart doesn’t have gaps, most of the candles don’t have upper or lower shadows. Moreover, the color of the current Japanese candlestick may differ from the current Heikin Ashi candle. Thus, you may get a fake signal if you confuse the charts.
To conclude, Heikin Ashi is one of the most reliable and simplest indicators for forex trading. As any trader knows how to read Japanese candlesticks, every trader will be able to catch the signals of this indicator quickly. However, before you start using the indicator for real trades, it’s worth training on a demo account.
Libertex provides traders with a demo account that fully duplicates the real market. It doesn't matter if you don’t trade for real, you can use the whole range of indicators and feel the atmosphere of the actual market.
Let’s answer the most frequently asked questions.
Is Heikin Ashi Reliable?
Heikin Ashi is one of the most trustworthy indicators. It uses only previous movements, which is the most reliable approach. However, you should remember that there is no perfect indicator or pattern that will guarantee a 100% result. That’s why, we recommend applying Heikin Ashi with other patterns or indicators.
What Is The Difference Between Heikin Ashi and Japanese Candlesticks?
The primary difference is the formula. Japanese candlesticks show the price chart itself with open, close, high, and low prices. While Heikin Ashi removes the price noise. Thus, you get a clear trend without small corrections.
How Do You Use Heikin Ashi?
There are two primary functions. Heikin Ashi is used to determine the strength of the trend and its reversal.
Where Can I Get the Heikin Ashi Chart?
Any trading platform has the Heikin Ashi chart, which is simply implemented into the main chart, as an indicator or alone as the main chart. If you use MetaTrader, you should open the “Insert” window, click “Indicators”, “Custom” and choose Heikin Ashi, or simply replace the Japanese chart with the Heikin Ashi one.
How Are Heikin Ashi Candles Calculated?
Here is the basic formula:
- If you need to calculate the open price, add open (last bar) and close (last bar) prices, and divide the amount by 2.
- To calculate the close price, add open, high, low, and close prices, and divide the sum by 4.
- To get high, you need to gauge high, open, or close minimum of the period.
- To get low, you need to determine low, open, or close minimum of the period.
How Do You Trade Heikin Ashi Candles?
All you have to do is determine whether candles are bearish or bullish. If they are bearish, you have a downward trend. Remember, that if bearish candles don’t have upper shadows, the trend is more robust. Bullish candles reflect the uptrend. If they don’t have lower shadows, the trend is more reliable. If you see a Doji candlestick, you should expect a trend reversal.
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